Marketing Metrics & The Law Of Diminishing Returns

Are you having poor results in the CPC, CPL or CPA? In this article, I would like to show you that the online marketing metrics can be sometimes effected negatively by the law of diminishing returns. Sounds peculiar? keep on reading this article and you will see why this happens & how to take the proper actions to avoid it.

The law of diminishing marginal returns is well known in the field of economics and is often used to describe a drop in the marginal contribution of one production factor of a product or a service after using the same production factors.

A simple example is when you have a shoes factory where any new worker manufactures 10 shoes a day. If your factory already has 100 workers it produces 1,000 shoes a day. But if you will decide to add a new worker you won’t get 1,010 shoes but 1,006 shoes. This may happen to due to various reasons like the new worker is incompetent for the job, or that he/she needs lots of training, or maybe he/she talks too much at work. It doesn’t really matter – the final result is that the production is not growing linearly, but is being a bit slower in average than before adding the last worker. Furthermore – if you will decide to add more workers than they will also add less than 10 shoes a day. Are you getting the idea?

In online marketing metrics this law also applies according to my experience. The result will be a decrease or an increase in a metric leading to poor results & which are sometimes not cost-effective. In this article I’ll show you some metrics where this phenomenon can happen:

1. Search CPC Increases Even Though the Bid is Low & The Quality Score is Perfect (10 out of 10)

No marketer can do that great a job in decreasing the CPC. He/She can indeed dominate a certain phrase & can place ads at the topmost position for a very long period, but at a certain point any of the following can happen and ruin his/her accomplishment. The result will be that the CPC will go higher.

(a) One of your competitors had improved his ads & landing pages and got a perfect quality score while offering a higher bid than you did. Bam, you lost the topmost position. Now what you need to do in order to stay in the game is increase your bid so its value will be more than the competitor.

(b) You strategically demoted the ad to a lower position, since you want to save cost. You are starting to get the same level of impressions, but no clicks. Since your ad’s CTR is effected by a change in at least the impressions or clicks, in this case CTR will drop & the advertising system will ask for more money per click.

(c) The campaign manager is overwhelmed by the amount of work he/she has. As a result he/she mistakenly streams lots of impressions to an ad without noticing it. Hence, the amount of impressions increases significantly and the CTR drops, thus causing the CPC for the following clicks to rise.

2. The CPL Increases, After Its Value Was Compatible With The Business Goals

(a) Addition of new campaigns which were not part of the optimized campaigns may cause the rise of the CPL basically because it was not optimized or not optimized enough.

(b) Without adding of new campaigns – the proportion of non converting traffic is not optimized due to the a enormous amount of traffic so less conversions happen for more cost as time goes bye and eventually the CPL increases.

(c) The workload of the PPC team surpasses its campaign management capabilities. In this case the law of diminishing returns will show an increase in CPL just because there will be nobody to take care of whatever needs to be taken care in the PPC accounts.

3. The CPA Increases But The Conversion Funnel Is Highly Optimized

(a) If a website experiences extensive growth in incoming traffic but it’s not ready to accept traffic beyond its technical capabilities, its page load speed will slow. In this situation there will be a growth in the spend per click without any return because all of the new visitors will avoid waiting for the completion of a page load, and will abandon the site (the bounce rate will increase).

(b) Any of the reasons mentioned in section 2 is relevant also, because there is a connection between the CPA and the CPL. A drop in the leads’ conversion rate will lead to a high CPL which in turn will decrease the amount of conversions and increase the CPA.

(c) The conversion funnel is optimized to handle a specific kind of marketing channels but when new kind of marketing channel is added the existing conversion funnel may fail to handle in a conversion rate that’s adequate with the business’ goals.

Conclusion

As you can see, there is a possibility the law of diminishing returns will work against you when you trying to address your audience. What I offer to do is to use this two guidelines when you are want to grow your website:

(a) Make sure that technically your website will be able to handle extensive growth in the amount of traffic. Depending of the current traffic the best practice is to plan for growth between 30% and 300% in the amount of visitors.

(b) Pay attention that your online marketing teams have enough personnel & automation tools and analysis tools so that your organization will be able to respond fast to the expected changes.